Investors have watched economic data closely in search of signs of strength in the U.S. economy, believing that the Federal Reserve is likely to use such data to justify any decision to increase short-term interest rates in the future. With that in mind, many market participants looked forward to Friday morning's release of July's retail sales data from the Commerce Department, and the relatively weak numbers supported the conclusion that the Fed is likely to be slow in moving forward with rate hikes at its September meeting.
Overall, retail sales were unchanged in July, ending a streak of three consecutive months of gains. The $457.7 billion in seasonally adjusted retail sales was up 2.3% compared to year-ago levels, reflecting the fairly muted performance of the retail industry over the past year.
Yet it took strong performance from the volatile automotive segment to prevent even worse numbers on the retail sales front. Motor vehicle and parts dealers saw monthly gains of 1.1%. Without the upward influence of the auto industry, adjusted retail sales would have fallen 0.3% in July compared to June's figures.
One major contributing factor to the weakness in retail sales came from the energy market. Gasoline prices have fallen substantially over the past month, and that led to poorer numbers from gas station retail locations. The Commerce Department's data indicated a 2.7% drop in gas-station retail sales just in the past month, and that added to a huge 11% decline since this time last year.
Other areas also performed poorly. Department store retail sales fell half a percent for the month, worsening a 4% decline since summer 2015. Grocery stores saw sales fall 0.9% between June and July.
Apart from the auto industry, the biggest positive movement came from nonstore retailers selling retail goods without physical store locations. Sales jumped 1.3% during the month for that segment, adding to gains that have lifted the category's sales by more than 14% since July 2015.
Will the Fed wait longer?
The retail sales data added ammunition to arguments that the Federal Reserve will hesitate to move too quickly on the interest rate front. Other figures released by the Bureau of Labor Statistics Friday morning showed that the Producer Price Index fell 0.4% during July, and the central bank looks closely at inflation-related measures for signs of pricing pressures that would warrant upward movements in benchmark interest rates. With little worry about inflation -- in fact, most of the world is seeing considerable deflationary pressure at the moment -- the Fed's need to rush to boost rates toward more typical levels isn't as urgent.
Indeed, the prevailing trend among economists has continued to push rate hike expectations further into the future. Before the U.K. Brexit vote to leave the European Union, many investors had thought that the Fed might move rates higher as early as June, with September being extremely likely. Yet now, most economists believe that December is the more likely date for further Fed movement. After today's data releases, moreover, any rate increase during 2016 appears less likely.
What might change the Fed's mind, however, is a sign of a quick turnaround. Quarterly results from major department store retailers released this week have given investors new hope after a long period of underperformance. If retailers' efforts lead to increased sales, then data in future months might give the Fed the evidence it needs to push rates upward toward a more normal level of accommodation in its monetary policy. For now, though, investors appear comfortable with the idea that rates will stay where they are for at least the next several months.